Highly Valued Financial Stocks Aren’t In A Bubble, Morgan Stanley Says

Highly valued financial stocks aren't in a bubble as they are supported by adequate growth and earnings, according to Anil Agarwal, head of Asia financial research at Morgan Stanley.

“With most of the big guys, we have a punchy ‘Overweight',” Agarwal told BloombergQuint in an interview, adding he wouldn't recommend buying bank stocks otherwise. “There's nothing else in the world of financials that's giving you this kind of earnings growth.”

According to Agarwal, the valuations of most of the big banks, barring one or two, are still at long-term averages, which isn't the case in other sectors.

India's non-bank lenders have been reeling since September last year, when shock defaults at IL&FS Group companies triggered a credit squeeze in the markets.

That pain extended to mortgage lenders, including Dewan Housing Finance Corp. Ltd. and as well as Reliance Capital Ltd. and Piramal Capital & Housing Finance Ltd. Financials, whose weight in the Sensex has more than doubled in the past decade, have seen sharp erosion in their share prices in the wake of the NBFC crisis.

From a net interest margin perspective, margins are broadly flat, despite the fact that rates are coming down, Morgan Stanley's Agarwal said. “In a lower rate environment, generally for banks with high CASA (current and savings account) ratios, margins should trend down. But margins are relatively holding up, which is a great thing.”

Watch | Morgan Stanley's Anil Agarwal on what's in store for Indian financials